ATA Urges Limits on Oil Futures to Prevent Excessive Speculation

By Michele Fuetsch, Staff Reporter

This story appears in the Aug. 10 print edition of Transport Topics.

The Commodity Futures Trading Commission should create position limits on energy contracts across all trading platforms to protect the trucking industry from excessive speculation in oil futures, a representative of American Trucking Associations testified at recent CFTC hearings.

“Every 1-cent increase in the price of diesel costs the trucking industry an additional $397 million a year,” said Steven Graham, a vice president of Schneider National Inc., one of the nation’s largest carriers.

In recent weeks, the CFTC has been moving toward stricter regulation of position limits — the number of oil futures contracts one investor can hold.

Currently, position limits in oil futures contracts are set by the commodity markets themselves, but the CFTC has said it plans to exercise its statutory power to collect data on who holds contracts and to establish position limits.

In his testimony before the CFTC commission Aug. 5, Graham said gyrating fuel prices combined with soft demand for freight transportation services “have left trucking companies struggling to survive.”

What’s more, Graham and others testified, recent price spikes in the cost of crude oil and diesel represent a puzzling “disconnect” be-tween oil market activity and the economic fundamentals of supply and demand.

“On Feb. 12, [crude] oil hit a short-term low of $34 per barrel,” Graham testified. “Four months later, the price more than doubled to $72,” he told the commissioners.

Yet, during those four months, global demand was weak, crude oil inventories were high and the dollar declined by only 9% relative to the euro, Graham testified.

“In the face of these market realities, excessive speculation is the only other variable left unaccounted for,” the Schneider executive said.

Graham was among some two dozen representatives from Wall Street, academia and industries that rely heavily on oil who testified before the commission in a series of hearings that stretched over two weeks.

Besides addressing position limits, witnesses and commissioners expressed a desire for greater transparency in the futures market to determine who is buying oil futures contracts.

“Speculation isn’t a four-letter word,” said Commissioner Bart Chilton, “and if people want to do it, they should be free to do it. But from my personal perspective, I’m just concerned that there is an unintended consequence of the aggregate, long only or passive speculation . . . even just a little bit can have a huge impact on industries or on our economy and it’s our job to look out for this and, hopefully, we’re going to get it right.”

Historically, those trading in commodities markets had a tangible connection to the futures they were buying. Trucking firms and airlines, for instance, bought oil futures contracts and were allowed hedge exemptions, meaning they could hold more futures contracts than an ordinary investor.

In recent years, however, large investors who never take delivery of a commodity have pumped large sums of money into futures markets.

Critics say such investors undermine the purpose of the commodities markets, which was to allow users of the commodities to hedge against sudden price rises.

“The creation of the futures market was not intended to be a substitute for a gambling casino for Wall Street banks, hedge funds, sovereign funds and index funds,” said Paul Cicio, who also testified at the hearings.

Cicio, who represented the Industrial Energy Consumers of America, told the commission natural gas prices are being adversely affected by these new investors.

Besides his verbal testimony, Graham and ATA submitted 12 pages of written testimony, which drew praise from commissioners who said they appreciated ATA’s suggestions.

ATA said that to promote transparency and move toward effective position limits, the commission needs to require reporting of transactions so it can “quantify and understand” the degree of influence over-the-counter and other off-exchange contracts have on the market.

The CFTC also should establish an advisory committee to “continually analyze the data generated” and make recommendations on the amount of speculative investment that should be allowed. The majority of advisory committee members, ATA said, should be commercial participants — those who use the commodity.

And in establishing position limits, ATA said, the CFTC “must distinguish between commercial and non-commercial participants” that don’t take delivery of the commodity.